Income Taxes

Significant components of the provision for income taxes from continuing operations are as follows for the years ended December 31:



	2015			2014			2013
	(Dollars in millions)
Current tax expense:
Federal	$	257.9		$	87.7		$	79.0
State	21.9			(15.0		)	12.5
Total current tax expense	279.8			72.7			91.5
Deferred tax expense (benefit):
Federal	(32.1		)	2.4			15.0
State	21.2			(19.0		)	(6.4		)
Total deferred tax expense (benefit)	(10.9		)	(16.6		)	8.6
Interest expense, gross of related tax effects	0.1			(1.9		)	(0.3		)
Total income tax provision	$	269.0		$	54.2		$	99.8

A reconciliation of the statutory federal income tax rate and the effective income tax rate on income from continuing operations is as follows for the years ended December 31:



	2015	2014	2013
Statutory federal income tax rate	35.0%	35.0%	35.0%
State and local taxes, net of federal income tax effect	6.2	(11.1)	1.5
Loss on subsidiary stock	—	(24.9)	—
Non-deductible health insurer fee	17.9	24.8	—
Non-deductible compensation	2.4	4.8	3.6
Tax exempt interest income	(1.5)	(2.9)	(2.4)
Other, net	(0.8)	1.4	(0.7)
Effective income tax rate	59.2%	27.1%	37.0%

The effective income tax rate from continuing operations was 59.2%, 27.1% and 37.0% for the years ended December 31, 2015, 2014 and 2013, respectively. For the years ended December 31, 2015 and 2014, our effective tax rate was impacted by the health insurer fee which became effective under the ACA. Our health insurer fee payments of $233.0 million and $141.4 million in 2015 and 2014, respectively, were not deductible for federal income tax purposes and in many state jurisdictions. See Note 2, under the heading "Accounting for Certain Provisions of the ACA—Premium-based Fee on Health Insurers" for additional information regarding the health insurer fee.

During the year ended December 31, 2014, we recorded a $73.7 million tax benefit, net of adjustments to our reserve for uncertain tax benefits, as a result of a worthless stock loss. The loss was incurred with respect to the stock of Health Net of the Northeast, Inc., the former parent company of subsidiaries sold to an affiliate of UnitedHealth Group in 2009. The amount and character of the loss could be challenged by the taxing authorities, and as such, we increased our reserve for uncertain tax positions by $16.4 million related to this transaction. The tax benefit from the stock loss was primarily responsible for reducing our statutory tax rate below the statutory federal tax rate of 35% for the year ended December 31, 2014.

In all periods presented, our effective income tax rate has not been impacted by operations in foreign jurisdictions with varying statutory tax rates. Our health care operations are almost entirely domestic.

Significant components of our deferred tax assets and liabilities as of December 31 are as follows:



	2015			2014
	(Dollars in millions)
DEFERRED TAX ASSETS:
Accrued liabilities	$	83.0		$	72.8
Accrued compensation and benefits	63.1			68.8
Net operating and capital loss carryforwards	20.8			21.6
Unrealized losses on investments	3.7			0.5
Insurance loss reserves and unearned premiums	15.4			13.7
Deferred gain and revenues	14.7			1.3
Tax credits	5.5			10.8
Deferred tax assets before valuation allowance	206.2			189.5
Valuation allowance	(22.4		)	(13.3		)
Net deferred tax assets	$	183.8		$	176.2
DEFERRED TAX LIABILITIES:
Depreciable and amortizable property	$	58.2		$	53.0
Prepaid expenses	11.3			10.7
Deferred revenue	5.2			9.6
Unrealized gains on investments	4.5			5.6
Other	1.4			6.3
Deferred tax liabilities	$	80.6		$	85.2

During 2015, our total valuation allowance increased by a net $9.1 million, primarily resulting from the state net operating loss and state tax credits generated for which realization is uncertain.

For 2015, 2014 and 2013 the income tax benefit realized from share-based award exercises was $10.5 million, $8.7 million and $6.1 million, respectively. Of the tax benefits realized, $4.7 million, $1.1 million and ($1.4) million were allocated to stockholders’ equity in 2015, 2014 and 2013, respectively.

As of December 31, 2015, we had federal and state net operating loss carryforwards of approximately $6.1 million and $270.5 million, respectively. The net operating loss carryforwards expire at various dates through 2035.

Limitations on utilization may apply to all of the federal and state net operating loss carryforwards. Accordingly, valuation allowances have been provided to account for the potential limitations on utilization of these tax benefits. No portion of the 2015 valuation allowance was allocated to reduce goodwill.

We maintain a liability for unrecognized tax benefits that includes the estimated amount of contingent adjustments that may be sustained by taxing authorities upon examination. A reconciliation of the beginning and ending amount of unrecognized tax benefits, exclusive of related interest, is as follows:



	2015			2014			2013
	(Dollars in millions)
Gross unrecognized tax benefits at beginning of year	$	61.5		$	55.6		$	57.3
Increases in unrecognized tax benefits related to the current year	3.1			25.5			4.4
Increases in unrecognized tax benefits related to prior years	9.5			—			—
Decreases in unrecognized tax benefits related to a prior year	—			(17.5		)	(0.2		)
Settlements with taxing authorities	(3.8		)	—			(1.9		)
Lapse in statute of limitation for assessment	(22.2		)	(2.1		)	(4.0		)
Gross unrecognized tax benefits at end of year	$	48.1		$	61.5		$	55.6

Of the $51.0 million total liability at December 31, 2015 for unrecognized tax benefits, including interest and penalties, approximately $30.6 million would, if recognized, impact the Company’s effective tax rate. The remaining $20.4 million would impact deferred tax assets. Of the $64.9 million total liability at December 31, 2014 for unrecognized tax benefits, including interest and penalties, approximately $19.6 million would, if recognized, impact the Company’s effective tax rate. The remaining $45.3 million would impact deferred tax assets.

We recognized interest and any applicable penalties which could be assessed related to unrecognized tax benefits in income tax provision expense. Accrued interest and penalties are included within the related tax liability in the consolidated balance sheet. During 2015, 2014 and 2013, $0.1 million, ($1.9) million and ($0.3) million, respectively, of interest was recorded as income tax provision (benefit). We reported interest accruals of $1.6 million, $1.8 million and $3.7 million at December 31, 2015, 2014 and 2013, respectively. Provision expense and accruals for penalties were immaterial in all reporting periods.

We file tax returns in the federal as well as several state tax jurisdictions. As of December 31, 2015, tax years subject to examination in the federal jurisdiction are 2012 and forward. The most significant state tax jurisdiction for us is California, and tax years subject to examination by that jurisdiction are 2011 and forward. Presently we are under examination by various state taxing authorities. We do not believe that any ongoing examination will have a material impact on our consolidated balance sheet and results of operations.

In the next twelve months, it is reasonably possible that our unrecognized tax benefits, that are currently subject to uncertainty, would not change.